How do rewards programs work?
In order to calculate how much you can get in rewards, we have to make some assumptions about your spending habits. The 2011 Consumer Expenditures Report shows how the average household spent its money in 2011. You can see the results of that study in the chart here.
To make matters simple, let’s assume that you will put your groceries, restaurant bills, clothing, fuel, and entertainment (movies, music, etc.) on your credit card.
- Groceries: $3,838
- Restaurants: $2,620
- Clothing: $1,740
- Fuel: $2,655
- Entertainment: $2,572
Total spent for the year: $13,425
We will use this total to calculate the approximate rewards you would earn after using your card for one year.
Since there is no annual fee for the first year, we will assume that you have already had the card through that time. This will give you a more realistic look at your rewards value.
Approximate Annual Rewards
- Base rewards: .01 x $13,425 = $134.25
- Bonus: $134.25 x .5 = $67.13
- Annual fee: - $39 (note the negative)
Total: $134.25 + $67.13 - $39 = $162.38
You may not think that’s a lot of money, but you have to remember that’s extra money just for using your card. There are cards with much higher rewards programs available, but those typically have much higher annual fees as well. You need to assess your spending habits in line with the cards available to you to determine if a rewards program will work for you.